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Robinhood Hit With FINRA's Biggest-Ever Penalty

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What You Need to Know

  • FINRA fined Robinhood $57 million and ordered it to pay about $12.6 million in restitution to clients.
  • The regulator cited a litany of offenses, including communicating false and misleading information to customers and major trading platform outages.
  • Within 60 days, an officer of Robinhood is to submit to FINRA a signed, written certification that the firm stopped making false or misleading statements.

Robinhood’s compliance and regulatory woes have increased as the Financial Industry Regulatory Authority fined the firm $57 million and ordered it to pay about $12.6 million in restitution, plus interest, to what FINRA said were “thousands of harmed customers.”

“The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations,” the industry self-regulator said on Wednesday.

Without admitting or denying FINRA’s findings, Robinhood signed a FINRA letter of acceptance, waiver and consent on June 22 in which it consented to the imposition of FINRA’s sanctions against it.

The sanctions also included agreements that Robinhood will retain a third-party consultant and that, within 60 days of FINRA’s issuance of its notice of acceptance of the AWC, an officer of Robinhood will submit to FINRA a signed, written certification that the firm stopped making the false or misleading statements described in the AWC.

Robinhood’s Response

“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Jacqueline Ortiz Ramsay, head of public policy communications at Robinhood, said in a statement provided to ThinkAdvisor.

“We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all,” she added.

Robinhood also published a blog post focusing on what the company said were the many changes it made over the last several years for the benefit of its clients.

In a corrective action statement included at the end of the AWC, Robinhood said the remedial measures it had undertaken since early 2020 included: enhancing its legal, compliance, risk and antifraud functions; strengthening its supervisory structure; remediating client communications and data displays; expanding client support; and improving supervision of options.

‘Widespread and Significant Harm’

In determining the appropriate sanctions, FINRA said it “considered the widespread and significant harm suffered by customers, including millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”

FINRA found in its investigation that, despite Robinhood’s self-described mission to “de-mystify finance for all,” during certain periods since September 2016, the company “negligently communicated a wide array of false and misleading information to its customers,” FINRA said in the AWC.

The false and misleading information concerned various critical issues, including whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or “negative buying power” customers had, the risk of loss customers faced in certain options transactions, and whether clients faced margin calls, according to FINRA.

For example, one young Robinhood investor who had turned margin “off” committed suicide in June 2020, FINRA said. In a note found after that client’s death, he expressed confusion as to how he could have used margin to buy securities because he believed he had not “turned on” margin in his account, according to FINRA. Robinhood also displayed to that investor (and certain other clients) inaccurate negative cash balances.

Also, because of Robinhood’s misstatements, thousands of other customers suffered more than $7 million in losses, according to FINRA. As part of the settlement with FINRA, Robinhood is required to pay more than $7 million in restitution to those clients.

FINRA also found that since Robinhood started offering options trading to customers in December 2017, the firm failed to exercise due diligence before approving clients to place options trades, relying on algorithms known at Robinhood as “option account approval bots” to approve investors for options trading, with only limited oversight by firm principals, according to FINRA.

Those bots often approved trading options based on inconsistent or illogical information, FINRA said. As a result, Robinhood approved thousands of customers for options trading who either didn’t satisfy the company’s eligibility criteria or whose accounts contained red flags indicating options trading might not have been appropriate for them, according to FINRA.

FINRA also found that, from January 2018 to February 2021, Robinhood failed to reasonably supervise the technology it relied on to provide core broker-dealer services, including accepting and executing customer orders, FINRA said.

Between 2018 and late 2020, Robinhood experienced a series of outages and critical systems failures. The most serious outage happened March 2-3, 2020, when Robinhood’s website and mobile applications shut down, preventing Robinhood’s clients from accessing their accounts during a time of historic market volatility. More outages followed, including one on March 9, 2020.

Robinhood had a business continuity plan at the time of the March 2-3 outage but did not apply it because the plan was unreasonably limited to events that impacted the firm’s physical location, according to FINRA. Robinhood’s inability to accept or execute customer orders during those outages resulted in individual investors losing tens of thousands of dollars and FINRA is requiring the firm to pay more than $5 million in restitution to affected clients, the regulator said.

Between January 2018 and December 2020, Robinhood also failed to report to FINRA tens of thousands of written client complaints that it was required to report, according to FINRA.

“This action sends a clear message — all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets,” Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement, said in a statement.

Earlier Actions

Since early 2020, Robinhood has been targeted in various legal actions. William F. Galvin, Massachusetts’ top securities regulator, accused Robinhood of violating state law by using overly “aggressive tactics to attract new, often inexperienced, investors” and “gamification to encourage and entice continuous and repetitive use” of its mobile application.

In December, the Securities and Exchange Commission said Robinhood agreed to pay a $65 million civil penalty to settle allegations that it repeatedly failed to disclose its receipt of payments from trading firms for routing client orders to them, and also failing to satisfy its duty to seek the best reasonably available terms to execute customer orders.

In January, a complaint seeking class-action status was filed against Robinhood by Siddharth Mehta, a client of the company who allegedly “lost tens of thousands of dollars” after the company’s platform was breached by a hacker as a result of what the plaintiff said was Robinhood’s negligence.

Later that month, a class action complaint was filed in U.S. District Court for the Northern District of California in which Robinhood was accused of “material omissions, misrepresentations, and concealment” of its “dark pool” of payments for order flow arrangements.